AMC-Carmike CIS

22 Pages·2016·0.21 MB·English

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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA

Plaintiff,
v.

AMC ENTERTAINMENT HOLDINGS,
Civil Action No.:
INC.,

and

CARMIKE CINEMAS, INC.,

Defendants.

COMPETITIVE IMPACT STATEMENT

Plaintiff, United States of America, pursuant to Section 2(b) of the Antitrust Procedures
and Penalties Act (“APPA” or “Tunney Act”), 15 U.S.C.§16(b)-(h), files this Competitive
Impact Statement relating to the proposed Final Judgment submitted for entry in this civil
antitrust proceeding.
I. NATURE AND PURPOSE OF PROCEEDING
On March 3, 2016, Defendant AMC Entertainment Holdings, Inc. (“AMC”) agreed to
acquire all of the outstanding voting securities of Defendant Carmike Cinemas, Inc. (“Carmike”).
AMC and Carmike are the second-largest and fourth-largest movie theatre circuits, respectively,
in the United States.
AMC owns significant equity in National CineMedia, LLC (“NCM”) and Carmike owns
significant equity in SV Holdco, LLC, a holding company that owns and operates Screenvision
Exhibition, Inc. (collectively “Screenvision”). NCM and Screenvision are the country’s two
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main, preshow cinema advertising networks, covering over 80% of movie theatre screens in the
United States.
The United States filed a civil antitrust complaint on December 20, 2016, seeking to
enjoin the proposed acquisition and to obtain equitable relief. The Complaint alleges that the
acquisition, if permitted to proceed, would give AMC direct control of one of its most significant
movie theatre competitors, and in some cases, its only competitor, in 15 local markets (identified
as the “Local Markets” in the Complaint)1 in nine states. Moviegoers would likely experience
higher ticket and concession prices and lower quality services in these local markets as a
consequence.
The Complaint further alleges that because AMC will hold sizable interests in both NCM
and Screenvision post-transaction, and Screenvision will lose Carmike as a source of future
growth of its network, the acquisition would substantially lessen competition in the markets for
preshow services and cinema advertising. This loss of competition likely would result in
increased prices and reduced services for advertisers and theatre exhibitors seeking preshow
services.
The likely effect of AMC’s acquisition of Carmike will be to substantially lessen
competition in the exhibition of first-run, commercial movies in the 15 Local Markets, and in the
sale of preshow services and cinema advertising on a nationwide basis, in violation of Section 7
of the Clayton Act, 15 U.S.C. § 18.

1 As alleged in the Complaint, the 15 Local Markets are Montgomery, Alabama; Destin and Miramar Beach,
Florida; Orange Park and Fleming Island, Florida; Cumming, Georgia; Lithonia and Conyers, Georgia; Crestwood
and Lansing, Illinois; Normal and Bloomington, Illinois; Pekin, Peoria, and Washington, Illinois; Inver Grove
Heights and Oakdale, Minnesota; Coon Rapids and Mounds View, Minnesota; Rockaway and Sparta, New Jersey;
Westfield and Cranford, New Jersey; Lawton, Oklahoma; Allentown and Center Valley, Pennsylvania; and Madison
and Fitchburg, Wisconsin.
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At the same time the Complaint was filed, the United States also filed a Hold Separate
Stipulation and Order (“Hold Separate”) and a proposed Final Judgment. Under the terms of the
proposed Final Judgment, which is explained more fully below, AMC is required to take certain
actions that are designed to eliminate the anticompetitive effects that are likely to result from
AMC’s acquisition of Carmike. Specifically, the Defendants are required to: (1) divest movie
theatres in the 15 Local Markets where it and Carmike are direct competitors; (2) sell down its
equity interest in NCM such that it owns no more than 4.99%; (3) relinquish its seats on NCM’s
Board of Directors and all other governance rights it holds in NCM, (4) transfer 24 theaters with
a total of 384 screens to the Screenvision cinema advertising network and divest any of those
theatres it does not successfully transfer; and (5) implement and maintain “firewalls” to further
ensure that it does not obtain NCM’s, Screenvision’s, or other exhibitors’ competitively sensitive
information or become a conduit for the flow of such information between NCM and
Screenvision.
The United States and Defendants have stipulated that the proposed Final Judgment may
be entered after compliance with the APPA. Entry of the proposed Final Judgment would
terminate this action, except that the Court would retain jurisdiction to construe, modify, or
enforce the provisions of the proposed Final Judgment and to punish violations thereof.
II. DESCRIPTION OF THE EVENTS GIVING RISE TO THE ALLEGED
VIOLATION

A. Defendants and the Proposed Transaction
Defendant AMC is a Delaware corporation with its headquarters in Leawood, Kansas.
As of September 30, 2016, AMC operated approximately 388 theatres with a total of 5,295
screens located across 31 states and the District of Columbia. AMC reported approximately
$1.89 billion in U.S. box office revenues in 2015 and approximately $1.46 billion in U.S. box
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office revenues for the first nine months of 2016. Measured by number of theatres, screens, and
box office revenue, AMC is the second-largest theatre circuit in the United States.
AMC is one of the three founders of the NCM cinema advertising network, owns 17.4%
of NCM, controls two seats on NCM’s Board of Directors, and has certain governance rights
over NCM. AMC’s ownership interest in NCM will increase to 26.5% after it acquires Carmike.
Defendant Carmike is a Delaware corporation with its headquarters in Columbus,
Georgia. As of September 30, 2016, Carmike operated approximately 271 movie theatres with a
total of 2,917 screens located across 41 states. Carmike reported approximately $490.0 million
in U.S. box office revenues in 2015, and approximately $370.8 million in U.S. box office
revenue for the first nine months of 2016. Measured by number of theatres, screens, and box
office revenue, Carmike is the fourth-largest theatre circuit in the United States.
Carmike is the largest theatre circuit in the Screenvision cinema advertising network. It
also owns approximately 19% of Screenvision, controls a seat on Screenvision’s Board of
Directors, and has certain governance rights over Screenvision.
B. The Competitive Effects of the Transaction on the Exhibition of First-Run,
Commercial Movies

1. The Relevant Markets

As alleged in the Complaint, movies are a unique form of entertainment. The experience
of viewing a movie in a theatre is an inherently different experience from live entertainment
(e.g., a stage production or attending a sporting event) or viewing a movie in the home (e.g.,
through streaming video, on a DVD, or via pay-per-view).
Reflecting the significant differences of viewing a movie in a theatre, ticket prices for
movies generally differ from prices for other forms of entertainment. For example, typically,
tickets for live entertainment are significantly more expensive than a movie ticket, whereas the
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costs of home viewing through streaming video, a DVD rental, or pay-per-view is usually
significantly less expensive than viewing a movie in a theatre.
Viewing a movie at home differs from viewing a movie in a theatre in many ways. For
example, the size of the screens and sophistication of the sound systems differ, and, unlike at
home, in the theatre, one has the social experience of viewing a movie with other patrons.
In addition, the most popular newly released or “first-run” movies are not available for
home viewing at the time they are released in theatres. Movies are considered to be in their
“first-run” during the four to five weeks following initial release in a given locality. If
successful, a movie may be exhibited at other theatres after the first-run as part of a second or
subsequent run (often called a “sub-run” or “second-run”).
Moviegoers generally do not regard sub-run movies as an adequate substitute for first-run
movies. Reflecting the significant difference between viewing a newly released, first-run movie
and an older sub-run movie, tickets at theatres exhibiting first-run movies usually cost
significantly more than tickets at sub-run theatres.
Art movies and foreign-language movies are also not reasonable substitutes for
commercial, first-run movies. Art movies, which include documentaries, are sometimes referred
to as independent films. Although art and foreign-language movies appeal to some viewers of
commercial movies, art and foreign-language movies tend to have more narrow appeal and
typically attract an older audience than commercial movies. Exhibitors consider the operation of
theatres that predominantly exhibit art and foreign-language movies to be distinct from the
operation of theatres that predominantly exhibit commercial movies.
For all of these reasons, the Complaint alleges that a hypothetical monopolist controlling
the exhibition of all first-run, commercial movies in a relevant geographic market would
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profitably impose at least a small but significant and non-transitory increase (“SSNIP”) in ticket
prices. Thus, the exhibition of first-run, commercial movies is a relevant product market and line
of commerce under Section 7 of the Clayton Act in which to assess the competitive effects of
this acquisition.
Moviegoers typically are not willing to travel very far from their home to attend a movie.
As a result, geographic markets for the exhibition of first-run, commercial movies are relatively
local. As detailed in the Complaint, there are 15 Local Markets in which AMC and Carmike
compete today and each is a relevant geographic market in a section of the country for purposes
of Section 7 of the Clayton Act.
2. Competitive Effects
Exhibitors compete to attract moviegoers to their theatres over the theatres of their rivals.
They do that by competing on price, knowing that if they charge too much (or do not offer
sufficient discounted tickets for matinees, seniors, students, or children) moviegoers will begin to
frequent their rivals. Exhibitors also compete by seeking to license the first-run movies that are
likely to attract the largest numbers of moviegoers. In addition, exhibitors compete over the
quality of the viewing experience by offering moviegoers the most sophisticated sound systems,
largest screens, best picture clarity, best seating (including stadium, reserved, and recliner
seating), and the broadest variety and highest quality of snacks, food, and drinks at concession
stands or cafés in the lobby or served to moviegoers at their seats.
AMC and Carmike currently compete for moviegoers in the Local Markets. As detailed
in the Complaint, all 15 Local Markets are highly concentrated, and will experience significant
additional increases in concentration as a result of the transaction. In each of the Local Markets,
the proposed acquisition would give AMC control of a majority, or all, of the first-run,
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commercial movie theatres and between 48% and 100% of the annual box office revenues. The
transaction will also eliminate substantial head-to-head competition between AMC and Carmike
that has provided consumers with lower prices and a higher quality movie-going experience.
3. Entry and Expansion
Sufficient, timely entry that would deter or counteract the anticompetitive effects in the
Local Markets is unlikely. Exhibitors are reluctant to locate new, first-run, commercial theatres
near existing, first-run, commercial theatres unless the population density, demographics, or
quality of existing theatres makes new entry viable. Timely entry of new, first-run, commercial
movie theatres in the areas in and around the Local Markets would be unlikely to defeat a price
increase by the merged firm.
C. The Competitive Effects of the Transaction on the Preshow Services and Cinema
Advertising Markets

1. Relevant Markets

As alleged in the Complaint, both preshow services sold to exhibitors and cinema
advertising sold to advertisers in the United States are relevant markets under Section 7 of the
Clayton Act, 15 U.S.C. § 18.
Preshow services consist of the packaging of advertisements and content into a preshow
delivered to exhibitors, enabling them to earn revenue from the use of their screens before the
feature film. The price charged to exhibitors for preshow services is the portion of advertising
revenue retained by the network.
The sale of preshow services to exhibitors constitutes a relevant product market and line
of commerce under Section 7 of the Clayton Act. There are no reasonable substitutes for
preshow services. Exhibitors cannot easily replace the preshow services that they buy from
cinema advertising networks because individual exhibitors generally lack sufficient screens and
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geographic reach to secure national advertising. Nor can exhibitors sufficiently replace national
advertising in preshows with local and regional advertising because local and regional
advertising generates far less revenue than national advertising. Because there are no reasonable
substitutes for preshow services, a hypothetical monopolist of all such services could profitably
impose a SSNIP. Thus, the Complaint alleges that the market for preshow services is a relevant
product market in which to assess the competitive effects of the acquisition.
Cinema advertising is the on-screen advertising incorporated in the preshow. The
Complaint alleges that the sale of cinema advertising to advertisers is a relevant product market
and line of commerce under Section 7 of the Clayton Act. Cinema advertising has important
attributes that differentiate it from other forms of video advertising. For example, the preshow is
projected on a large screen with high-quality video and sound in a darkened auditorium. In
contrast to TV and other video advertising platforms, the audience cannot avoid the
advertisements by fast forwarding through them, clicking past them, or changing a channel. The
preshow also allows for long-form advertisements typically not available on TV, and it reaches a
weekend audience and light TV viewers who are otherwise difficult to reach.
NCM and Screenvision compete with each other throughout the United States.
Exhibitors and advertisers in the United States would not switch to cinema advertising networks
located outside of the United States in the event of a SSNIP in the United States. Accordingly,
the Complaint alleges that United States is a relevant geographic market and section of the
country for preshow services sold to exhibitors and for cinema advertising sold to advertisers
within the meaning of Section 7 of the Clayton Act.
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2. Competitive Effects
As a significant owner of equity interests in both NCM and Screenvision post-merger,
AMC would have an incentive to reduce the head-to-head competition between NCM and
Screenvision. AMC will likely use its influence and governance rights in both companies to
ensure that NCM and Screenvision compete less aggressively to sign contracts with exhibitors
and advertisers at the expense of the other network. AMC will also have the ability to use its
access to confidential, nonpublic, and trade secret information of NCM and Screenvision to
reduce competition by passing that competitively sensitive information between the companies.
The lessening of competition between NCM and Screenvision will likely result in lower
payments and/or lower quality preshows for exhibitors. Additionally, advertisers will no longer
benefit from the lower prices that have resulted from the competition between NCM and
Screenvision. Advertisers do not have choices other than these two networks to reach a broad
number of viewers of their cinema advertising.
As further alleged in the Complaint, the loss of an independent Carmike also likely would
weaken Screenvision’s ability to remain a robust competitive check on NCM, the only other
significant competitor in the preshow services and cinema advertising markets. In 2014, the
United States filed a civil antitrust lawsuit to block NCM’s acquisition of Screenvision and
preserve the intense competition between the companies. NCM and Screenvision subsequently
abandoned their merger in early 2015. As was the case in 2014, Carmike remains Screenvision’s
largest exhibitor, and Screenvision touts the Carmike theatre network’s current, broad scale when
competing to execute deals with advertisers and exhibitors. The merger, however, will extend
AMC’s exclusive contract with NCM to include any new theatres that Carmike would have
opened or acquired. This shift from Screenvision to NCM will likely weaken Screenvision’s
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ability to compete because: 1) it will be unable to rely on Carmike’s growth to increase its
network’s scale; and 2) the number of independent theatre exhibitors unencumbered by an
exclusive preshow agreement with NCM will shrink as exhibitor consolidation continues. For all
of these reasons, the Complaint alleges that the merger is likely to substantially lessen
competition in the preshow services and cinema advertising markets.
3. Entry and Expansion
According to the Complaint, the entry barriers associated with developing a cinema
advertising network are high, and thus new entry or expansion by existing competitors is
unlikely to prevent or remedy the proposed merger’s likely anticompetitive effects in the
preshow services and cinema advertising markets. Barriers to entry and expansion include the
time and cost of developing a network of screens to achieve sufficient scale. NCM’s and
Screenvision’s lock-up of almost all of the exhibitors in the United States through staggered
long-term contracts makes entry a long process. This adds to the already high cost of building
the infrastructure necessary to develop and attract national advertisers. It also increases the
length of time an entrant must sustain losses before its scale is large enough to sell advertising at
long-term profitable rates.
Exhibitors generally cannot supply preshow services themselves to replace the substantial
lessening of competition in the preshow services market. Individual exhibitors or groups of
small exhibitors whose contracts with NCM or Screenvision are expiring are unlikely to be able
to establish cost-effective sales forces, attract national advertisers, or otherwise develop a
sufficient infrastructure to reasonably replace lost competition.
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